Over-the-counter stocks are don’t trade on major exchanges like the NYSE and NASDAQ, so accessing OTC stocks can be more difficult. However, once you find a broker who offers access to OTC stocks, the buying and selling process is pretty much the same.
In this short post, we’ll explain OTC stocks and show you how to trade them.
What Are OTC Stocks?
OTC stocks are stocks that don’t trade on regulated exchanges. Often times, OTC stocks are high-risk, high-reward investments. Traders can buy a huge quantity of shares with only a small investment. If the company becomes successful, investors make huge profits from a small stake in the company.
Most companies trading on OTC markets are known to have massive potential because of new technology, the product they roll out, or other activities they carry out. However, because these companies don’t divulge much information, investors don’t really know much about their activities.
How To Buy OTC Stocks
Determine How Much You Want To Invest
You should know that OTC stocks are usually riskier compared to other stocks. Treat them as speculative investments and strategize appropriately. Don’t invest anything that you are not willing to lose.
Choose a Good Broker
The second step is to find an appropriate broker. Most major brokers offer OTC trading. However, smaller brokers like Robinhood and Webull don’t offer access to OTC stocks. Look for a broker that offers OTC stocks with no trading fees.
Fund Your Trading Account
Once you’ve opened your brokerage account, it’s time to fund it. Deposit your investing funds and get ready to buy. Be aware that some brokers charge a deposit fee, but most reputable brokers do not. Use an ACH transfer from a US bank account to minimize fees. Funds should be available within a few business days.
Buy The OTC Stocks
Buying OTC stocks is pretty much the same as buying exchange-listed equities. Once you type in the ticker and find the stock you want, all you have to do is press buy and enter your order. The process is pretty much identical. Just enter the ticker symbol and go.
As long as your broker offers OTC stocks, this part should be easy. If you can’t find the stock you’re looking for, your broker might not offer OTC trading. You’ll have to double-check with customer service to make sure.
Most times, you can still use your broker’s full arsenal of trading options and tools. However, be aware that data can be limited for OTC stocks. You might not have access to all the analytics you’re used to using. Sometimes, the charts might seem choppy or there might not even be a chart available. You might have to do some digging to access the data you’re looking for. Remember, OTC stocks can vary depending on where you’re buying them, so it’s hard to find universal price data.
Pay attention to volume and liquidity. Look at the spread between the buy and ask prices on the order book. If there is a wide gap between them, you could run into problems when it comes time to exit your positions. Always be careful when purchasing low-volume, low-liquidity OTC stocks.
Pros of OTC Stocks
- Low prices.
- Investors can buy smaller companies that aren’t listed on major exchanges.
- Foreign stocks are often available via the OTC market.
- High potential for reward.
Cons of OTC Stocks
- Low volume, low liquidity.
- Bifurcated price data.
- Limited access.
- Low regulation.
- High risk.
OTC Stocks: Final Thoughts
OTC stocks can be great speculative investments for traders with a decent appetite for risk. If you’re ready to take a deeper dive into OTC stocks, you should sign up for Stock Dork Alerts. We write Dork Alerts so they’re fun, informative, and easy to understand. Best of all, they can help you become a better trader. Sign up today and get a jump on the New Year with our 2020 Growth Stock Guide, it’s yours free when you join. Click here to join and claim your free copy now.